Debate Renewed Over Effectiveness of Microlending in Reducing Poverty

New studies suggesting that microlending programs fail to raise borrowers' income levels have reignited the debate over the effectiveness of the model in alleviating poverty, the Wall Street Journal reports.

Under the microfinance model, very small loans are made to help the poor start businesses and boost their incomes. As borrowers repay the principle and interest on those loans, the growing pool of money is lent out to other poor people. But independent studies published in the January issue of American Economic Journal: Applied Economics that examined microloan proigrams in Ethiopia, India, Mexico, Mongolia, Morocco, and Bosnia and Herzegovina found that while the loans did give borrowers better access to credit, they tended not to increase borrowers' incomes or consumption. Nor did the studies find much evidence of significant social dividends, such as empowering women or improving educational opportunities for their children. Indeed, one study cited evidence suggesting that microloans encouraged families to pull their children out of school to work in the family business.

"This is kind of a defining moment," said Abhijit Banerjee, an economics professor at the Massachusetts Institute of Technology who co-wrote the study on microlending in India, during a debate at a World Bank conference in February. "The big question that we would like to answer is: [W]hat is the right product [for the poor] to have? What is missing?"

Defenders of microlending argue that the model was never expected to end poverty quickly but rather to give more choices to poor people who had been largely ignored by banks and other lenders. Alex Counts, president and CEO of the Grameen Foundation, an international arm of Grameen Bank, which pioneered microlending at scale in Bangladesh, said even the most negative reports show that up to 10 percent of microloan recipients see a big rise in income, while the rest typically do not experience a decline. And Counts suspects other microfinance programs, especially those in Bangladesh, which were not surveyed by the latest studies, would show a higher success rate. Still, he said, the reports should be "a call to action for researchers, practitioners, and policy makers to roll up their sleeves and work collaboratively to develop successive waves of better credit products for the poor."

"The theme of financial inclusion does not have the same shine as it once had, and this kind of study certainly contributes to that," said Vikram Akula, the founder of SKS Microfinance, one of India’s largest microlenders, who left SKS in 2011 and recently launched a for-profit financing firm that targets people without bank accounts. "It is part of a broader narrative that microfinance isn't a panacea, which we all knew."

Eric Bellman. "Calls Grow for a New Microloans Model." Wall Street Journal 03/17/2015.